In the last year, the Department of Labor (DOL) has stepped up enforcement efforts on employers who misclassify workers as independent contractors. In fact, the DOL has implemented The Misclassification Initiative and has been working in conjunction with the IRS to share information in what they describe as an effort “to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal labor laws.”
Penalties for employers who misclassify workers include fines and liability for back unpaid employment taxes. If you have multiple employees that the DOL and IRS deem to be misclassified, you may have a significant penalty to pay.
In determining whether or not an individual is an employee or an independent contractor all comes down to what the IRS calls the degree of control and independence.
According to the IRS as detailed at www.irs.gov, an employee is defined as: “Anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”
The IRS also indicates how to determine if someone is an independent contractor: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done….”
There are various tests used to determine the degree of control and independence, which tends to fall into three categories:
All factors must be weighed when reviewing the three categories to determine if a worker is an employee or an independent contractor — not one factor weighs more heavily than another, nor is there a set number of factors that must be met to make the determination. According to the IRS, “The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”
The best way to protect you and your staffing company is to establish and follow a set of best practices to ensure your classification standards are consistent and that you have adequate documentation to support that classification.
One way to accomplish this is to have clear, written agreements outlining the nature of the worker relationship. According to a recent article entitled Yours, mine, or ours? Avoiding joint employer and contractor misclassification on lexology.com by Betsy Johnson, an attorney for Ogletree Deakins, a contract should include language that addresses the following:
A solid contract is a great place to start, however, it’s also important to be mindful of how independent contractors are treated in relation to employees after the contract is in place. It’s important that separation is maintained between the two groups. This includes (but is not limited to) some of the following situations:
It’s the totality of the relationship with the worker that determines how a court will view the employment relationship. The more safeguards you have in place – including written contracts and procedures (not just written procedures, but supported by actions) for how independent contractors are treated on a daily basis — the better prepared you’ll be to handle any potential liability claims.
If you have workers that you feel may be misclassified as independent contractors, the IRS has a new voluntary program called the Voluntary Classification Settlement Program. This program allows employers an opportunity to reclassify workers as employees for future tax purposes, while offering partial relief from federal employment tax liability. There are certain eligibility requirements; for more information, visit the Voluntary Classification Settlement Program page on the IRS website.
